Module 2 Part I Introduction to Partnership PDF

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De La Salle UniversitynullACTBFAR – Basic Financial Accounting and Reporting M ESPIRITUAccounting for PartnershipThe following are the major considerations in the accounting for the equity of a partnership: 1. Formation – accounting for initial investments to the partnership 2. Operation – division ...

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De La Salle University

ACTBFAR – Basic Financial Accounting and Reporting M.J ESPIRITU Accounting for Partnership The following are the major considerations in the accounting for the equity of a partnership: 1. Formation – accounting for initial investments to the partnership 2. Operation – division of profits or losses 3. Dissolution – admission of a new partner and withdrawal, retirement or death of a partner 4. Liquidation – winding-up of affairs Introduction to Partnership

Two or more persons may also form a partnership for the exercise of a profession. Contract - signifies whether initially. Money Properties can be sub-classified further: It could be a thing, animal, or anything that can be considered as a property. Industry Any work such as accounting, auditing, marketing, advertising, drawing, clerical work, other depending on the business being formed by the partnership, anything.

1. Mutual agency: Partners are agents for the partnership. 2. Limited life: Dissolution is the change in the relation of partners caused by any partner's ceasing to be associated in the carrying on of the business. 3. Unlimited liability: even beyond the amount of his or her investment, to satisfy partnership debts when the partnership cannot meet its obligations. 4. Co-ownership of contributed assets: All partners become co-owners of partnership assets. 5. Mutual participation in profits: Since the primary intention of a partnership is to earn profits, each partner shares in the partnership profits. 6. Income taxation: Only the distributable income to the partners declared in the individual income tax returns are subject to tax.

1. It is 2. It is partnership verbally or in writing.

The partners can agree to create the

3. More partners, more capital coming from the combined existing resources (through assets) and potential resources (from creditors) of the partners than in a sole proprietorship. 4. Better in decision making - There is Decisions can be made easily and changes can be effected immediately with less formalities provided that they are within the confines of the agreement and the partnership law. 5. Access to knowledge, skills, experience and contacts - It is assumed to have resulting from the participation, combined experience, and ability of partners than in a sole proprietorship. 6. Sharing Burden - The unlimited liability of the partners may be viewed by the creditors positively thereby

Disadvantages of a Partnership 1. It has 2. Easily Dissolved -

than a sole proprietorship. Thus, it is less stable than a

corporation. 3. Limited access to capitalCapitalization is 4. More difficult decision making This is not true in sole proprietorships and corporations. Moreover, a partner may be subject to personal liability for the misdeeds, wrongdoings, or omissions of fellow partners. 5. Potential for differences and conflict - It can be expected that several partners participate in business operations. When that happens, will be higher especially when the partners involved have similar levels of authority in the management of the partnership. 6. Unlimited Liability So if the business runs into trouble, the personal assets may be at risk of being seized by creditors, which would generally not be the case if the business was a limited company. 7. Profits must be shared - While a sole proprietor retains all the profits of their business, those of a partnership are shared amongst the partners. What happens when one partner is seen to be putting in less time and effort into the partnership, but still taking their share of the profits? It’s easy for resentment to occur if there doesn’t appear to be a fair balance between effort and reward.

Classifications of Partnership 1. As to activities or purpose: • Trading partnership: This is a partnership (buy, make, and sell) (buy and sell) of goods. • Non-trading partnership: This is a partnership whose Examples include

2. As to liability of partners • General partnership: This is a partnership and each partner can be held individually liable, pro-rata and sometimes solidarily with their personal property, for the obligations of the partnership. •

Limited partnership: Since a limited partner is answerable for partnership debts only up to the extent of his or her contribution,

3. As to duration • Partnership at will: This is a partnership

•

It upon the desire of at least one partner or mutual agreement of partners. Partnership with a fixed term: This is a partnership wherein Partnership is considered

4. As to legality of existence • De jure partnership: This is a partnership which has c •

De facto partnership: This is a partnership legal requirements for its existence.

5. As to representation to others • Ordinary or real partnership: This is a partnership •

Partnership by estoppel: This is a partnership In reality Example:

with all the

6. As to object • Universal partnership o Universal partnership of all present property: a partnership that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as the profits which they may acquire therewith. Property owned at the time of contribution will become common property of the partnership eventually because only the profits acquired through the contribution will become common property, unless there was a stipulation that says otherwise. This is not common in the Philippines. Example: A and B form a Universal Partnership of All Present Property and stipulate that property and profits that are acquired during business operations will become common property even if these were not due to their contributions and that if anyone inherits property, it will become common property as well. A acquires land as part of his compensation package from AyalaLand and B inherits land from his parents. Whose property will become common property? Only A’s land will become common property because it was essentially PAYMENT while B’s was inherited. The article prohibits donations to become common property, only fruits of such can become common property. o

Universal partnership of all profits: This partnership comprises all that the partners may acquire by their industry or work during the existence of the partnership. Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. Example: Suppose A and B form a Universal Partnership of All Profits and A wins in the lotto, P200,000.00. B tries to share in 50% citing the existence of their partnership and that A used the partnership’s money to purchase the lottery ticket. Can B really share in the lotto winnings? No, B cannot since it came from CHANCE, not WORK. If the P200,000.00 instead came from A’s work in DLSU, can B share in the profits of A? Yes, because it came from WORK. As long as it is PROFIT, the profit becomes common property to the partners UNLESS there was a stipulation in their agreement.

Note: Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. So a husband and wife cannot join a universal partnership. They are not allowed to donate to each other and a universal partnership essentially requires that the partners donate to each other. They can join a particular partnership instead. •

Particular partnership: This partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation. Examples: Example: Those that are formed for the acquisition and sale of property, Accounting Firms, Law Firms, etc.

Classification of Partners 1. As to contribution: • Capitalist partner: A partner who contributes money (cash) or property • Industrial partner: A partner who contributes industry (labor, skill, talent, service, or expertise). An industrial partner is not liable for losses. • Capitalist-industrial partner: A partner who contributes money or property and industry 2. As to liability • General partner: A partner whose liability to third persons extends to personal assets or property • Limited partner: A partner whose liability to third persons is limited only to the extent of capital contributed to the partnership 3. As to management • Managing partner: A partner who actively manages the operations and affairs of the partnership • Silent partner: A partner who does not participate in the management of operations and affairs of the partnership 4. Other classifications • Liquidating partner: partner who takes charge of winding up the operations and affairs of the partnership upon dissolution • Nominal partner: one who is not really a partner and not a party to the partnership agreement but is made liable as a partner for the protection of innocent third persons • Ostensible partner: partner who takes an active part in the management of the partnership and is known to the public as a partner • Secret partner: partner who takes an active part in the management of the partnership but is unknown to the public as a partner • Dormant partner: partner who does not take an active part in the management of the partnership and is not known to the public as a partner. He or she is both a silent and a secret partner. • Continuing partner: partner who continues business after dissolution • Surviving partner: partner who remains after the death of the partner • Sub-partner: partner who enters into contracts with partners • Original partner: partner who is a partner at the time of organization • Incoming partner: partner who is about to become a partner • Retiring partner: partner who is about to withdraw as a partner

REFERENCES: Dela Cruz, A.L.C., Rabo, J.S., & Tugas, F.C. (2019). Basic financial accounting and reporting....